Tuning In: Why Popular Video-Sharing Site Faces Challenges

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Hulu gets some portion of its traffic by streaming episodes of older TV shows -- think "Hill Street Blues," "21 Jump Street " and "The Greatest American Hero" -- that inevitably jumped the shark. Is it crazy to think the popular video-sharing site is about to do the same?

Reports surfacing yesterday suggested Hulu -- backed by Walt Disney Co., Comcast's NBC Universal, News Corp. and Providence Equity Partners -- has been approached by a potential buyer and was mulling its options. If all the backers thought Hulu's future was secure and guaranteed, the suitor would have been spurned outright and the press would have nothing upon which to feed. Disclosure of the approach begs the question of whether Big Media, which gave Hulu a lift by stamping it with its glitzy imprimatur, now feels the site is heading towards obsolescence.

It's true, viewers still tune in to Hulu, and the company said on its blog earlier this year that it expected to generate $500 million in total revenue in 2011, up from $263 million in 2010 and $108 million in 2009. And Providence, which injected about $100 million into Hulu in 2007, is said to be pleased with the company's growth and prospects, according to a person familiar with the situation.

A person familiar with one of Hulu's media owners said the site has exceeded initial financial expectations by a wide margin. While some sort of "liquidity event" has long been built into plans for Hulu, owing to Providence's involvement, this person said, the backers feel positively about the site whether it continues under their ownership or under a new owner that meets the right criteria.

But those Hulu figures don't yet describe a business on par with the main ones controlled by the company's media owners. Hulu's projected 2011 revenue doesn't come close to the approximately $4.49 billion in ad revenue alone that Fox took in during 2010, according to Kantar Media -- and that with roughly just 14 hours of prime-time programming during the week. Even the comparatively paltry CW network secured about $613 million last year from a mere 10 hours or so of prime time per week.

Hulu CEO Jason Kilar said in April that "the content community will earn approximately $300 million from Hulu over the course of 2011." Consider that money has to be split any number of ways between various programming providers; the sums may not seem so robust to individual media firms.

Hands down, Hulu is an innovative place that should be remembered for the strides it has taken in trying to make video advertising more effective. The site shows significantly fewer ads than the TV networks, even allowing viewers on occasion to choose the commercial (from a limited selection) they might most like to see. The site's spartan design, the short pre-roll videos and other deliberate choices all contribute to a top-notch viewing experience.

But that might not, as a matter of fact, mesh completely with its owners' agendas.
Mr. Kilar in February articulated a vision in which online viewing is never required to carry the same number of ads that populate traditional TV.
News Corp. however, has been pushing the company to run more advertising, at least in some cases. Fox has also used some portion of Hulu inventory -- the network receives a slice of it to sell every year -- as "make goods" for its TV clients. That hardly suggests Fox sees the site's advertising as blue-ribbon stuff.

Meantime, CBS, which never joined the Hulu parade, has talked up its recent content deal with Netflix -- and its intention to sell its TV-show content to any other distributors that might like it. "The more, the merrier," CBS CEO Leslie Moonves said during a conference call with analysts earlier this year, citing Amazon and Echostar, which has agreed to buy up the assets of the Blockbuster movie-rental operation, as potential customers down the road. He has suggested revenue from such pacts could amount to "hundreds of millions of dollars."

And CBS can't be alone in this ambition. All content producers -- from major ones such as Disney and Comcast on down to the smallest production house -- want as many options as possible for making money in the so-called "video aftermarket."

But would Hulu owners Disney, Comcast and News Corp. feel hampered in similar deal-making? Crafting an agreement with Amazon, for example, could well undermine the power of the companies' content on Hulu.

And then there's Comcast's unique situation, barred from direct involvement in Hulu affairs after the government allowed it to assume majority ownership of NBC Universal. That can't make Hulu's fate much more certain.

There's also the question of whether Hulu has been leapfrogged by others. Netflix says it has more than 23 million paying subscribers who can choose to access its vast library of content almost at will, depending on available technology. Hulu's Hulu Plus subscriber service is expected to exceed 1 million paying subscribers by the end of 2011, Mr. Kilar said in an April blog posting.

In a worst-case scenario for Hulu, the media world will remember it for the way it upped the ante on video streamed online. Google's YouTube, by comparison, still looks like it was put together by the pirate-radio enthusiast portrayed by Christian Slater in "Pump Up the Volume." And Hulu had that really funny Alec Baldwin commercial in the 2009 Super Bowl.

But the site may not become the dominant force in online programming. There are too many other potential rivals in this nascent sector -- pools of potential viewers and money with which Big Media will want to wet its beak, rather than betting everything on one site.

~ ~ ~Tuning In is an ongoing series of commentaries by Ad Age TV Editor Brian Steinberg on the TV schedule, the ads it carries and changes within the industry. Follow him on Twitter.